Some of the drop was made up by investment demand from exchange trade funds (ETFs) however as global insecurity and negative interest rates increased demand for “safe haven” assets. Jewelry demand fell 16% to its lowest level since 2010. The big drop was in India, where purchases for jewelry were down 32% yoy. Demand in China was also down 14% yoy, while the Middle East fell 12%.
You can easily see why demand in India fell so much more than it did elsewhere. The price of gold is only about 5% off its record high in INR terms (and EUR), but still 15% below the record in CNY terms, and well below in USD terms. This means for global (i.e. USD-denominated) accounts looking to hedge their other assets, gold is still attractive, but Indian consumers may have their doubts about the risk/reward balance. Besides, people looking to invest a specific amount of money into gold may not be happy with the small(er) amount of gold that they can gold with their savings and may prefer to put off the purchase for another time.
Meanwhile however the amount of gold being held in ETFs hit a record 2,855.3 tonnes in Q3, according to the WGC.* Holdings grew by 258.2 tonnes during the quarter, the highest level of quarterly inflows since Q1 2016. Accommodative monetary policies, along with safe-haven and momentum buying, drove demand.
You can easily see what’s driving the ETF demand for gold: accommodative monetary policy that has sent interest rates world-wide into negative territory. This is a fascinating reversal of gold’s historic role as a hedge against inflation. Now it’s being used as a hedge against deflation. That’s because negative interest rates offset the main drawback of gold as a financial investment, which is that it doesn’t produce any income. But nowadays, earning no interest is better than earning a guaranteed loss!
What can we conclude from this? It seems to me that there is almost an automatic stabilizer at work in the gold market. If the price falls, the Indian jewelry accounts may return to the market, keeping it from falling too far. That would be particularly likely if the price starts falling because of an improved global outlook, because that improved global outlook should also translate into an improved Indian economy. However, “too far” is a relative matter. Over the last year, the 363-tonne increase in purchases by ETFs was more than enough to offset the 237-tonne decrease in demand for jewelry and bars & coins (85.3 tonnes for the former, 151.2 tonnes for the latter). If this process starts moving in reverse, it’s hard to imagine the demand for physical gold totally outweighing the reduced demand for paper gold (i.e., ETFs).